G.R. No. 157901 - Orix Metro Leasing and Fice Corp. vs. M/V "Pilar-I

Orix Metro Leasing and Finance Corporation (petitioner) is a domestic corporation engaged in leasing and financing, while respondents Ernesto and Lourdes Dy are proprietors of Limchia Enterprises, a shipping business owner.
Limchia Enterprises obtained a loan of P4,764,024.00 from Orix Metro, evidenced by a Promissory Note executed on 3 August 1990.
As security, the spouses executed:

A Promissory Note with a stipulated payment schedule in 36 monthly installments.
A Continuing Suretyship Agreement by Ernesto Dy, making him a solidary obligor.
A Deed of Chattel Mortgage over the vessel M/V Pilar-I.
A Real Estate Mortgage over their Quezon City home.

With the loan proceeds, Limchia Enterprises acquired and registered M/V Pilar-I.
The vessel’s Certificate of Ownership and Certificate of Philippine Registry were issued by the Philippine Coast Guard.
The chattel mortgage was duly registered and annotated on the vessel’s Certificate of Ownership pursuant to the Ship Mortgage Act of 1978.

On 27 December 1990, M/V Pilar-I was attacked by pirates, and later brought to Palau Sapi, Kota Kinabalu, Malaysia, resulting in financial losses for the spouses.
The spouses failed to pay the scheduled installments; by August 1992, their paid amortization (P2,775,339.00) was less than the expected P3,140,364.00.
Orix Metro issued several demand letters and a final legal demand letter on 21 February 1992 for overdue amounts.
In response, the spouses sought to restructure their loan:

Lourdes Dy requested both the restructuring of payment terms and the release of the real estate mortgage.
Orix Metro, in its reply on 29 July 1991, conditionally approved the release of the mortgage upon final payment of P800,000.00.
Further negotiations ensued, with counter-offers and conditions including posting additional collateral, reinsuring the vessel, and issuing postdated checks.
Orix Metro eventually waived the additional collateral requirement in a 14 July 1992 letter but imposed other conditions which the spouses failed to fully comply with.

Due to continued partial and late payments, Orix Metro filed a Complaint and Petition for Extrajudicial Foreclosure of the Preferred Ship Mortgage on 18 August 1992.
The RTC of Makati City, Branch 64, issued an Order of Arrest on 1 September 1992, resulting in the seizure of M/V Pilar-I on 30 September 1992.
The spouses moved to lift or set aside the order claiming that their restructured schedule meant no default had occurred.
On 1 February 1993, the RTC initially granted their motion but later reversed itself on reconsideration, directing that the vessel be returned to Orix Metro.
The spouses assailed the RTC Order before the Court of Appeals, which on 21 March 1994 dismissed their petition for certiorari regarding the seizure order.
On 28 September 1994, Orix Metro transferred its mortgage rights in M/V Pilar-I to Colorado Shipyard Corporation (Colorado), subject to certain conditions approved by the RTC.
Ultimately, the RTC rendered a Decision on 31 July 1997 in favor of the spouses Dy, ruling that:

Due to the acceptance of partial and late payments during the restructuring, no default existed at the time of foreclosure.
The foreclosure of the chattel mortgage was therefore premature.
The judgment ordered the return of M/V Pilar-I to the respondents and awarded damages and attorney’s fees, subject to modifications.

Orix Metro appealed to the Court of Appeals, which largely upheld the RTC decision, modifying the awards:

The awards for actual damages were deleted.
Moral damages were reduced.
Attorney’s fees were reduced.
The spouses were ordered to reimburse repair and drydocking expenses (a point later deleted).

Orix Metro then filed a Petition for Review on Certiorari with the Supreme Court challenging the restructuring findings and application of advance payments.
The Supreme Court, on its review, affirmed the decisions of the lower courts and denied Orix Metro’s petition, holding that foreclosure was improper since no installment was actually overdue under the new schedule.

Whether the spouses Dy were in default at the time Orix Metro instituted the foreclosure proceedings given the agreed restructuring of their payment schedule.
Whether acceptance of partial and late payments by Orix Metro effectively waived its right to demand full payment and foreclose.

Whether the application of an advance payment (P289,480.00) to interest due was proper without an accounting disclosure to the spouses Dy.
Whether Article 1252 of the Civil Code properly governs such an application in installment payment contracts.

Whether the spouses Dy were still the legal possessors of the vessel M/V Pilar-I at the time the foreclosure was instituted.
Whether Colorado, as assignee of mortgage rights, was entitled to reimbursement for repair and drydocking expenses incurred during its possession of the vessel.

Whether the spouses Dy should be held liable for reimbursement of the expenses incurred with respect to the vessel.
Whether the spouses Dy were entitle to moral damages and attorney’s fees, and if so, to what extent.